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Tullow Oil - All dividends in 2019

Nicholas Hyett | 16 January 2019 | A A A
Tullow Oil - All dividends in 2019

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Tullow Oil plc Ordinary 10p

Sell: 50.10 | Buy: 50.30 | Change -1.80 (-3.46%)
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Tullow expects to deliver revenues of $2bn in 2018. However, free cash flow of $410m is expected to be below that achieved last year, following a $200m litigation payment in July and delays to the Ugandan farm-down.

Commenting on the results CEO Paul McDade said "Despite a volatile oil price, Tullow's improved balance sheet, low cost production and strong cash flow generation, even at lower oil prices, will allow us to both invest for growth and pay a sustainable dividend."

The shares fell 1.3% in early trading.

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Our View

It was touch and go for a while in early 2016, but Tullow is now firmly back on the right track. A firm commitment to paying a dividend is a big declaration of confidence by the board - but there is such a thing as over-confidence.

Tullow's debt pile is falling rapidly and with the huge Ghanaian field producing tens of thousands of barrels of oil a day, there's plenty of cash flow to service it. Borrowing's still a little higher than we'd like though, meaning the company's uncomfortably exposed to a reversal in oil prices (which have been looking rocky recently).

The twin tailwinds of increasing production and a rising oil price won't blow this strongly forever either.

The need to replace existing reserves is the monkey on the back of all oil groups. Tullow probably spent less than it would like over the last few years as it fought to keep its head above water, so we're not surprised to see the group increasing investment in new projects.

Fortunately the company has an excellent track record with the drill bit. Progress in the East African portfolio looks promising, with Ugandan and Kenyan assets in the early stages of development. The group has also added acreage in Cote d'Ivoire and Peru, with millions invested in exploration work around the world. These early stage assets are speculative but have the potential to generate significant upside.

Nonetheless, Ghana will remain the driving force for years to come, with further development of those fields expected to increase output significantly next year.

Tullow deserves credit for its exploration success, as well as its development achievements. A recovering oil price has dramatically increased the value of past successes, and its expertise are a catalyst for future performance.

A $100m a year dividend suggests shareholders could be in line for a 3.6% dividend yield going forwards, perhaps more if all goes well. But as ever, the group's success remains at the mercy of the oil price.

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Q4 Trading Statement

Tullow's West African oil fields produced 88,200 barrels of oil per day (bopd) in 2018, with a further 1,800 barrels of oil equivalent per day (boepd) in natural gas. That includes insurance payments equivalent to 8,600 bopd due to ongoing disruption at the Jubilee field.

Production is expected to increases substantially at both major Ghanaian fields next year, with group production reaching 94,000-102,000 boepd.

Tullow hopes to make final investment decisions for its Kenyan assets in 2019, with first oil still expected in 2022. The operators of Tullow's Ugandan assets are targeting a final investment decision in the first half of 2019.

Exploration will focus on Guyana during 2019, including drilling exploratory wells. The group is also planning geophysical surveys of prospects in Cote d'Ivoire, Comoros and around its existing assets in West Africa.

2018 sales revenue is expected to reach $1.8bn, reflecting an average realised oil price of $68 (after-hedging contracts), with $0.2bn in insurance payments.

Net debt is expected to fall $0.4bn year-on-year, with gearing falling to 1.9 times (2017: 2.6 times). As stated in November, the group expects to pay an annual dividend of no less than $100m a year from 2019.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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